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Factors Income Investors Should Consider Before Adding Orion Oyj (HEL:ORNBV) To Their Portfolio

Simply Wall St

Could Orion Oyj (HEL:ORNBV) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A high yield and a long history of paying dividends is an appealing combination for Orion Oyj. It would not be a surprise to discover that many investors buy it for the dividends. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Orion Oyj!

HLSE:ORNBV Historical Dividend Yield, December 15th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 101% of Orion Oyj's profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 102%, Orion Oyj's dividend payments are poorly covered by cash flow. As Orion Oyj's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

With a strong net cash balance, Orion Oyj investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Orion Oyj's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Orion Oyj has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was €0.95 in 2009, compared to €1.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.7% a year over that time.

Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Orion Oyj's earnings per share have been essentially flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. This level of earnings growth is low, and the company is paying out 101% of its profit. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with Orion Oyj paying out a high percentage of both its cashflow and earnings. Earnings not been growing, but we like that the dividend payments have been fairly consistent. In summary, Orion Oyj has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 Orion Oyj analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.